A price decline may be an opportunity to start with an increased initial dividend yield.

A monthly scan of the most significant price declines helps you find these opportunities.

Welcome to December’s edition of “U.S. Dividend Stocks On Discount”. Each month, I create a list of U.S. dividend stocks with heavy discounts in the last month. The purpose is to identify potential bargains for dividend investors.

But we need to be careful! As you surely know, a dropping stock price typically means one of the two things: either it is an opportunity to get more bang for your buck, or it is a warning sign that the company is facing serious headwinds and future dividends may be in trouble.

To assist you in evaluating the situation, I look at the three quality dividend stocks with high discounts. The objective is to give a solid overview of the company’s fundamentals and current situation by:

checking the long-term profit-growth based on earnings and cash flows.

checking if dividends are secure by looking at cash flows, and if necessary, debts and assets as well.

checking the current valuation using a dividend focused perspective by comparing current to historic dividend yield. This is done by what I call the relative dividend yield, which is based on the logic of the implied volatility rank used in option trading. In short, the relative dividend yield examines the current dividend yield in relation to its historical context. The metric's value ranges from 0 to 100. 100 means the current dividend yield is on all-time-high. If the current dividend yield is on all-time-low, the relative dividend yield is 0.

checking the current valuation by calculating fair values based on historic multiples of metrics like earnings per share (FV PE), operating cash flows per share (FV OCF) or fund from operations per share in the case of REITs.

This way, I present to you what I think to be the most essential aspects to give you an idea if it’s worth digging deeper.

The list of dividend discount stocks considers more than 300 of the most popular dividend stocks in the U.S. To ensure a minimum quality and attractiveness of all stocks, each stock needs to match the following criteria:

Thanks to a year-end rally in the wrong direction, we don't have to worry about a lack of special offers on the stock market. In total, DividendStocks.Cash is monitoring 135 US dividend stocks that meet the above quality criteria. Of these 135 stocks, just two stocks achieved marginal gains (Vectren Corporation [VVC] and Air Products and Chemicals [APD]). The average capital loss of all dividend stocks was -8.4%. To be as up to date as possible, the analysis refers to the period from 1st of December 2018 - 5th of January 2019.

The table below contains the 15 dividend stocks with the highest capital losses:

THO produces and distributes recreational vehicles. A cyclical business, as you can see from the slump in sales and margins during the financial crisis in 2009:

Declining sales and margins at THO during the financial crisis

Nevertheless, THO was able to increase sales in the long term through organic growth and acquisitions. The rapid revenue growth in 2017 is primarily due to the acquisition of Jayco, which in 2017 accounted for 1,814,048 USD of the 2,664,840 USD increase (Source: Annual Report 2017, page 32).

THO revenues and margins

Acquisitions accelerate growth, but are associated with additional risks when compared to organic growth. For example, Jayco's lower margins are leading to lower overall margins, reinforced by an unfavorable product mix towards lower-margin products (Source: Annual Report 2017, page 32). The operating margin fell from 8.56% in 2016 to 6.86% in the last four quarters, representing a 20% decline in operating profit.

As a result, profits have declined for the first time since the financial crisis.

THO: Declining earnings for the first time since the financial crisis

As a result of the acquisition of Jayco in particular, debt increased from 438 million USD in 2015 to 1.06 billion USD in the following year. Since then, however, debt has been reduced and the total debt ratio has fallen from 39.9% to 27.7% current.

THO: Most important balance sheet items including debt and free-cash-flow

Despite various acquisitions, goodwill increased only moderately from 313 million USD in 2015 to 387 million USD today. A strong indicator that THO does not rely on acquisitions at any cost.

The current dividend yield is in a historically high range, which is evident from the relative dividend yield of 81 out of a maximum of 100 points.

THO: Relative dividend yield of 81 points

The last quarterly report was disappointing. Sales fell by almost 22% compared to the same quarter of the previous year. The operating result from the sale of recreational vehicles even fell by 51%. Order backlogs fell by the same order of magnitude (Source: 10-Q, page 20). Yet, this is mostly the result of capacity expansions since the prior year, which allows for quicker production and delivery to dealers (Source: 10-Q, page 16).

Disappointing results in a generally weak market environment sent the stock price plummeting. From a high of 152 USD, the stock price has now fallen to 54 USD. A drop of about two-thirds!

THO: Stock price including valuations

The stock is currently valued at a very favorable level. Depending on the valuation, the fair value of the stock varies between 85 USD and 108 USD, which comes close to a theoretical undervaluation of 100%.

THO: Historic, current and forecasted dividend yield

Additionally, the price slump led to a jump in the current dividend yield from less than one percent to 2.8%.

THO is worth a closer look. If we are saved from an imminent recession and sales and margins stabilize, buyers could be rewarded with a nice dividend yield including double digit dividend growth and substantial capital gains.

RPM produces and sells coatings, sealants and specialty chemicals, primarily for maintenance and improvement applications. With a price drop of 20.8% in December, the stock was hit even harder than THO.

The evolution of profit and cash flow is subject to stronger fluctuations, but the direction is clearly upward.

RPM: Earnings, cash-flows and dividends history

In contrast to THO, the increase in revenue is much more even. Margins have been under pressure for 5 quarters due to rising raw material costs (source: 1st quarter report 2018, page 1). Yet in general, margins are very stable, indicating a robust and rather low-risk business model. Revenues continue to grow.

RPM: Revenues and margins

Compared to THO, the debt ratio is currently 65.87%, which is more than twice as high. Like THO, the goodwill arising from acquisitions accounts for a considerable part of the balance sheet.

RPM: Most important balance sheet items including debt and free-cash-flow

The recent capital losses can be explained by a very ambitious valuation of almost 70 USD at the peak. A price that was clearly too ambitious compared to a fair value between 41 USD and 49 USD. As of today, the stock is still no bargain, but much closer to fair valuation than before.

RPM: Stock price including valuations

The current dividend yield of 2.51% is rather low in the historical context, which is confirmed by a relative dividend yield of only 8 out of a maximum of 100 points.

RPM: Historic, current and estimated dividend yield

Quality comes at a price. This also applies to RPM. At the current level, I think the stock is particularly attractive for conservative dividend investors.

HOG lost about 18% in December. Since the high in 2014, the stock has even lost about 53%. Years of stagnating or even declining sales and margins indicate that HOG is facing a structural problem. This is especially true for the US, where less and less motorcycles are sold. International growth hardly compensates these losses (Source: 8-K 10/23/2018, page 2).

HOG: Revenues and margins

As with THO, we are dealing with a cyclical company. Fortunately, dividends are not endangered in this case either.

HOG: Earnings, cash-flows and dividends history

The poor performance of the stock, together with growing dividends, has led to a historically high dividend yield of currently 4.27%. The rather low relative dividend yield of 32 points is explained by the extremely high dividend yield of just under 11% during the financial crisis, which rewarded courageous investors.

HOG: Historic, current and estimated dividend yield

The low valuation of HOG in the historical context shows that the market does not see an easy solution for the poor performance of sales, especially in the domestic market. Depending on the valuation metric, the stock appears to be 100% undervalued.

RPM: Stock price including valuations

The analyst forecasts also predict stagnating to declining cash flows and profits. If this happens, it is unlikely that the stock price will recover permanently.

Profitability related metrics

Here are the key metrics regarding the profitability of the three stocks analyzed above. The low stability metrics of HOG clearly point to sales problems that have persisted for some time. In addition, the compound annual growth rate is even negative in related to profits and sales within the last 5 years.

Metrics related to profitability

Final overview

The table below shows the 15 US dividend stocks with highest discounts in December, including some more dividend-related metrics.

Overview of the Relative Dividend Yield including some additional dividend-related metrics

Dividend Payment Months

The screenshot below is taken from the Dividend Calendar. It shows in which month you need to own which stock to claim dividends based on the ex-date (bell symbol) and when dividends get paid based on the payment date (dollar symbol):

Dividend ex-dates and payment months

Conclusion

I presented a list of U.S. dividend stocks with the highest “discounts” in December and looked at three of these stocks to give you an idea if they are worth any further analysis. What do you think? Did you find any stock of interest? Did you even take the chance to “buy the dip”?

Disclosure:I am/we are long PM.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.